How are indefinite-lived intangible assets tested for impairment, and why aren't they amortized?

Question

AcadiFi · Accepted Answer

Indefinite-lived intangible assets occupy a unique space in financial reporting — they are not amortized but must be tested for impairment at least annually. **Why No Amortization?** An intangible asset has an indefinite useful life when there is **no foreseeable limit** on the period over which it will generate cash flows. Common examples include certain trademarks, broadcasting licenses with automatic renewal, and taxi medallions (pre-disruption). The asset is not amortized because its economic life is not bounded. **Impairment Test Mechanics** Under both IFRS and US GAAP, indefinite-lived intangibles are tested for impairment **at least annually** and whenever indicators of impairment exist. **Worked Example — Starpoint Media's Broadcasting License:** Starpoint holds a broadcasting license carried at $22 million. The license has no expiration and renews automatically. At year-end testing, the fair value is estimated at $17.5 million. | Item | Amount | |---|---| | Carrying value | $22,000,000 | | Fair value | $17,500,000 | | **Impairment loss** | **$4,500,000** | Under US GAAP (ASC 350), the test is a **one-step comparison**: carrying value vs. fair value. If carrying exceeds fair, the difference is the impairment loss. Under IFRS (IAS 36), the test compares carrying value to **recoverable amount** (higher of fair value less costs of disposal and value in use). \`\`\`mermaid flowchart TD A["Indefinite-Lived Intangible"] --> B["Annual Impairment Test"] B --> C{"IFRS or GAAP?"} C -->|"IFRS"| D["Compare Carrying Value
to Recoverable Amount"] C -->|"GAAP"| E["Compare Carrying Value
to Fair Value"] D --> F{"Carrying >
Recoverable?"} E --> G{"Carrying >
Fair Value?"} F -->|"Yes"| H["Impairment = Difference"] F -->|"No"| I["No Impairment"] G -->|"Yes"| H G -->|"No"| I H --> J["Reassess: Should Life
Become Finite?"] \`\`\` **Reclassification to Finite Life** At each reporting period, the entity reassesses whether the indefinite-life classification remains appropriate. If circumstances change (e.g., regulatory shifts, market disruption, contractual limits), the asset is reclassified to finite-lived and amortized prospectively over the revised useful life. This reclassification is treated as a **change in accounting estimate**. **Exam Tips:** 1. Indefinite does NOT mean infinite — it means no foreseeable limit at the reporting date. 2. The annual test is **mandatory** even if no indicators exist. 3. Unlike goodwill, impairment on indefinite-lived intangibles **can be reversed under IFRS** (but not GAAP). 4. A GAAP qualitative assessment is permitted before performing the quantitative fair value test. See our CFA Level II course for more intangible asset scenarios.

How are indefinite-lived intangible assets tested for impairment, and why aren't they amortized?

Master Level II with our CFA Course

Related Questions

Practice Questions